Corporate Governance and ISO Standards - What is the connection?
Today, intangible factors like trust and reputation contribute more to market capitalisation than net assets do. Simply put, shareholders are demanding that companies demonstrate good corporate governance.
Why do investors demand good corporate governance?
Massive corporate disasters over the last century have caused huge environmental, social, and economic damage, and society has responded with demands for better management practices.
What are we talking about?
The environment has been damaged through bad governance
In 1989, the Exxon Valdez went aground, spilling 40 million litres of crude oil into Alaska’s Prince William Sound. The BP Deepwater Horizon explosion, that killed 11 people in July 2010, dumped 757 million litres of oil into the Gulf of Mexico, spoiling 25 750 km of coastline.
Workers have been poisoned
Children have been used as cheap labour
In 1998, Nike was exposed for using child labour in the East and had to spend $1.13 billion to recover its tarnished reputation.
Environmental protection measures have been flouted
In 2015, it came to light that Volkswagen had programmed its cars to only apply emission control measures during testing, and had to budget $18.2 billion to deal with the matter.
Fraud at the highest levels has robbed people of their pension funds…
… and caused huge job losses. In 2001, Enron, a major electricity, natural gas, communications, pulp and paper group, filed for bankruptcy, due to fraud and corruption. It claimed revenues of $101 billion during the previous year.
Organisations formed to improve corporate governance and prevent disasters
A few of the more notable organisations that have been formed to deal with and help prevent disasters like those above, are:
- Organisation for Economic Cooperation and Development (OECD)
- Global Reporting Initiative (GRI)
- International Labour Organisation (ILO)
- International Integrated Reporting Council (IIRC)
A little more on each of these…
OECD was established after the First World War and aims to promote policies that improve the economic and social well-being of people around the world. The OECD signed a Moratorium of Understanding with ISO in 2008, and have been working closely to expand existing management system standards.
The Global Reporting Initiative (GRI) was established in 1997 by the Coalition for Environmentally Responsible Economies (CERES), a driving force behind the ISO 14001 standard. GRI’s main purpose is to guide reporting on sustainable development and is best known for pioneering sustainability reporting guidelines. In 2011, GRI signed a Memorandum of Understanding with ISO to drive sustainable development initiatives.
The International Labour Organisation (ILO) is an agency of the United Nations, established in 1919, to promote workers’ rights, encourage decent employment opportunities, enhance social protection, and strengthen dialogue on work-related issues. The ILO worked with the British Standards Institute (BSI) on generating a guideline that led to the worldwide use of OHSAS 18001. In 2013, the ILO reached an agreement to work with ISO to develop ISO 45001.
The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standards setters, the accounting profession, and NGOs. It was established in 2010. The IIRC published the International Integrated Reporting Framework in 2013, which is becoming one of the benchmarks for integrated reporting.
How ISO standards have been developed around good corporate governance principles
ISO Management System Standards (MSS) have been influenced by corporate governance principles through ISO’s relationship with IIRC, GRI, ILO, OECD, and other strategic partners. As a result, several corporate governance principles are addressed in the ISO High-Level Structure (HLS), a sort of template for ISO standards.
As an example, the International Integrated Reporting Framework, published by IIRC, requires an integrated report to address eight basic elements, which can also be found in the ISO High-Level Structure. Table 1 shows the alignment of the IIRC integrated report elements with the ISO High-Level Structure found in ISO Directive Part 1 Appendix 2.
How using ISO standards can help improve corporate governance
Changes to ISO Management System Standards (MSS) are revisited every five years. There are also new standards being introduced at a frequent rate. All existing MSS, as well as new ones, will eventually be structured on – and contain the preamble and terminology of – the ISO High-Level Structure. These new and revised ISO Management System Standards provide tools for improving the areas of governance that the individual standards target.
The determination of risk, to protect value, and determination of opportunity, to seek value, is a central tenet of the ISO High-Level Structure. Therefore, Risk Committees, the ‘right arm’ of the board, can adopt specific ISO Management System Standards to guide sound governance practices that address these touchpoints.
Many business benefits are derived by changing the organisation’s risk profile, including reduced insurance costs and mitigation of losses resulting from the relevant risk exposure.
What are the other advantages to using ISO standards?
There are numerous organisational benefits to being certified to an ISO Management System Standard. Because of the new philosophy underlying ISO Management System Standards, their requirements often allow for auditors to gauge behaviour and culture. Therefore, a characteristic like leadership, that is an important driver to create the culture or behaviour for compliance, can be directed at other requirements for good governance. The culture needed and the disciplined behaviour demonstrated for compliance, are also features of top-performing organisations.
Because stakeholders, such as investors and customers, gain improved confidence from certified organisations, there are marketing benefits to being able to publicise third party ISO certification.
Wynleigh International Certification Services understands the value of good corporate governance and the association with ISO Management System Standards. We, therefore, have a unique value proposition that is able to provide you with added benefits, such as a reduction in insurance costs.